The_Accounting_Equation

The Accounting Equation
Word Count:
418
Summary:
As an entrepreneur, who are thinking of going into business, or who is
already conducting business, you have to start learning about the basic
concepts of Accounting because they are the concepts that are used in
reporting your business activities to the government come tax time. It is
time you must know about one of the most fundamental concepts in
accounting.
Keywords:
forex, currency, currencies, trading, invest, wealth
Article Body:
As an entrepreneur, who are thinking of going into business, or who is
already conducting business, you have to start learning about the basic
concepts of Accounting because they are the concepts that are used in
reporting your business activities to the government come tax time. It is
time you must know about one of the most fundamental concepts in
accounting.
Accountants process data into documents called financial statements. It
is the accounting equation that is the basis for the entire accounting
system.
So what is this magical equation?
The Accounting Equation is:
ASSETS = LIABILITIES + OWNERS' EQUITY.
In crude definition,
ASSETS are economic resources of the business that are expected to bring
benefits for the business in the future.
LIABILITIES are economic resources borrowed by the business from another
person or an organization.
OWNERS' EQUITY is the economic resources that was contributed by the
owners of the business to the business.
One way of thinking of this equation is that the left side is what the
business has including its money, equipment, building, land, furniture,
etc... The right side indicates where these assets had come from. Were
they borrowed from parties outside the business, or were they contributed
by the people who own the business.
The other version of this equation, that you might bump into is the:
ASSETS - LIABILITIES = OWNERS' EQUITY.
In other words, if the business's assets pay off all its liabilities, you
are left with a figure that indicates the economic resources that belongs
to the business's owner.
It is pretty much the same thing, a concept of transposition in algebra.
If you take a look at a business's BALANCE SHEET - or what is now
modernly called as A STATEMENT OF FINANCIAL POSITION - you'll notice that
all the items in there are arranged following this accounting equation in
either one of its versions.
Of course in a BALANCE SHEET, it is written vertically, instead of
horizontally as it is in the equation.
You'll see the items arranged somewhat as:
ASSETS XXX LIABILITIES YYY OWNERS EQUITY ZZZ
Where, XXX = YYY + ZZZ.
So, next time you see a balance sheet aka statement of financial
position, take the time to recognize this logic.
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This article was written for OrangesAndLime.com, to help creative
individuals — artists, musicians, designers, illustrators and
entertainers — build their own freelance businesses. Please note that
this article serves as a guideline only. You should still seek
professional advice regarding the matter because laws and practices
change over time and they differ from country to country.